Realizing tomorrow todayDigital Reinvention in banking IBM Institute for Business Value

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Executive Report

Digital Strategy

Not your grandmother’s bank

The global banking industry continues its advance through a period of dramatic change.

Navigating high levels of regulation, and political and economic uncertainty, leadership of major

global banks continues to experience poor perceptions from the media and public alike. But

traditional banks are by no means in a terminal condition. The underlying chain through which

funds are transferred among economies is slow to change. However, the ways that banking is

conducted and which entities actually perform banking transactions are both experiencing

rapid evolution.

A majority of the global bankers we surveyed recognize the changes occurring around them. In

a recent IBM Institute for Business Value survey conducted in collaboration with the Economist

Intelligence Unit, 66 percent of global banking executives told us that their traditional value

chains are being replaced. Fifty-seven percent concluded that the boundaries between the

banking industry and other industries such as retail and telecommunications are blurring.

And 61 percent said the competition they face is coming from new, unexpected areas.1

Technological innovation is occurring in and around banks at what many consider an alarming

rate. The face of today’s banking is changing, largely due to:

• Ubiquitous digitization, combined with pervasive mobility and cloud computing, major

advances in artificial intelligence (AI) and cognitive computing

• A customer base in both retail and institutional segments that is dramatically more techno-

logically sophisticated and demanding.

Reimagining the enterprise

Reports of banking’s demise have been greatly

exaggerated. Banking and banks are here to stay.

However, the way banking is conducted – and at times

who conducts it – is changing. Intense focus on cost

cutting and efficiency is ceding to expansion and

growth. But growth extends beyond traditional

pursuits of new markets and customers. Leading

bankers are now prioritizing creation of secure

platforms and ecosystems. And these new capabilities

rely on sophisticated digital technologies. By

conceiving and creating the structures that define

banking’s future, banks are rethinking their roles and

activities from the ground up and from the outside in.

We call this process Digital Reinvention™.

1

Confronted by such broad-based and dramatic change, the first instinct of many traditional

banks has been to protect and defend. The rapid evolution of financial technology companies

– known as fintechs – was often either ignored or attacked. However for many leading banks,

this insular strategy is quickly giving way to a more accommodating strategy that is conducive to

capturing, facilitating and expanding innovation. Leading banks are increasingly positioning

themselves at the center of what are now referred to as banking ecosystems.

With their substantial experience and expertise in compliance and regulation, and with deep,

broad customer relationships, banks are increasingly partnering with, investing in or purchasing

the most successful and dynamic fintech insurgents. By doing so, banks increasingly play the

role of ecosystem orchestrator. They create a platform, environment and governance through

which third parties such as fintechs can engage, collaborate and innovate for the benefit of

customers, ecosystem partners and themselves.

Having been stable for decades, if not centuries, the role of banks is changing. Traditionally,

banks dominated all facets of their business. They accepted deposits and made loans with

sophisticated risk modeling and assessment and channel management. In the institutional

environment, a bank acted as trusted intermediary or service provider, and also as asset

manager and market maker.

66 percent of global banking executives surveyed said that traditional value chains are being replaced2

57 percentof global banking executives surveyed tell us that the boundaries between industries are blurring3

61 percent of global banking executives surveyed see competition coming from new and unexpected places4

2 Realizing tomorrow today

With more organizations participating, innovating and competing in an ecosystem environment,

the first effect is that banking activities are becoming more dynamic and specialized. In addition

to orchestration, banks are increasingly acting as specialist (as opposed to generalist) service

providers and intermediaries among customers, providers, buyers and sellers.

Second, banks are increasingly operating as distributors rather than originators. With channels

and relationships built over decades, banks are expected to use their own channels to distribute

innovative products built by ecosystem partners, in addition to themselves.

And third, also aligned with forces promoting greater specialization, banks are increasingly

playing the role of asset or instrument factory, creating new products that are distributed

through ecosystem partners, as well as on their own platforms.

As ecosystems continue to become more embedded in the psyche of bankers, they will

increasingly manage transparent distribution of products and services on their own platforms

– enabling them to create compelling customer experiences that offer competitive advantage.

3

Propagating the platform

Deep data pools, and sophisticated AI and associated technologies characterize the future of

banking and banks. And the data and tools to analyze it may be sourced from virtually

anywhere in the world. Connecting disparate data types within and outside the bank to help

motivate insights and decisions will be central to the success of banks and ecosystems.

The combination of traditional banking data – such as customer records, transactional

systems and predictive models, among others – with externally sourced, often unstructured

data – such as news and events, social media and communications, weather and geospatial

data – affords a rich source of contextual information. And as captured data and the tools that

analyze it become ever more sophisticated, banks that do not position themselves at the

center of data-fueled ecosystems could find themselves at a distinct disadvantage.

BBVA builds new business models in dynamic innovation platforms

Spanish bank Banco Bilbao Vizcaya Argentaria

(BBVA) is opening its customer banking data

application programming interfaces (APIs) to

ecosystem collaborators to build new products

and services within its own platform. BBVA’s

Banking-as-a-Service (BaaS) or Banking-

as-a-Platform (BaaP) approach promotes

business model and product innovation and

growth. BBVA also applies open innovation

principles to identify and work with the “best

of the best” in the world of fintech and digital

banking, building industry-leading expertise

in data analytics and emerging technologies

like blockchain. BBVA has accelerated its shift

toward digital through an organization-wide

cultural change. In 2015, the bank promoted its

head of digital banking to CEO and has been

embedding pro-digital leaders at the highest

levels of the organization.5

4 Realizing tomorrow today

By assuming responsibility for building open platforms of engagement, banks are able to

pursue multiple strategic goals. They can:

• Mediate relationships among customers, businesses and clients within a frictionless,

well-governed environment

• More easily integrate their products and services within partner activities and innovations

• Provide the tools, scale and scope to enrich, expand and deepen customer experience in

new and unexpected ways (see Figure 1).

Figure 1Building the banking platform

Source: IBM Institute for Business Value analysis.

Customers

Relationshipmediation

Provisioning services through ecosystems

Businesses Wealth clients

Banking platformAPIs | Digital | Agile | Cloud | Analytics | Cognitive

Lending Remittances

Personal finance Equity financing

Payments Investing

Banking services

Human resources Payroll

Marketing Business insights

Procurement IT

Non-banking services

5

You and me and E2E

The dynamic and disruptive environment in which banks and their customers find themselves

can best be understood within the context of what we call the everyone-to-everyone (E2E)

economy. The E2E economy has four distinct elements:

• Orchestrated, based on business ecosystems that are both collaborative and seamless

• Contextual, in that customer and partner experiences are calibrated and relevant to their

specific actions and needs

• Symbiotic, in that everyone and everything, including customers and businesses, are

mutually interdependent

• Cognitive, characterized by data-enabled, self-supported learning and predictive capabili-

ties (see Figure 2).

The E2E business environment is deeply digital. And from the earliest days of computerization

with the installation of some computers and development of electronic check processing in the

1950s, the banking industry has been at the vanguard of digital innovation. 5 Understandably,

some large banking corporations are more characteristic of information technology businesses

than a local or regional bank.7 As computerization became more common, banking became

ever more digital. Multibank electronic funds transfers became possible between accounts.8

Advances in digitization also made automatic teller machines (ATM) pervasive following

Barclays’s 1967 installation of the first one in London, England.9

This incremental progression toward digitization reflects the first phase in the digital journey of

banking: digitization through transformation of digital processes and finally Digital Reinvention.

Digital transformation in banking is more holistic and complete. It involves integration of digital

functions or processes across the enterprise. By combining sets of digital systems and

processes, digitally transformed banks are able to offer customers both individualized and

Figure 2The E2E economy consists of four elements

Source: IBM Institute for Business Value analysis.

Orchestrated

Contextual

Cognitive

Symbiotic

6 Realizing tomorrow today

omnichannel experiences. Efforts to obtain a single view of customers, break down product

or departmental silos, and enable cross-channel consistency are included within the concept

of digital transformation.

Digital Reinvention of banking goes further. With the aid of digital technologies, digitally

reinvented banking involves a fundamental reimagining of the way banks operate and engage

with their customers and other stakeholders. Digital Reinvention at its most fundamental level

reconceives banking using a customer-first or customer-centric perspective. It entails forming

or redesigning actual banks and their ecosystem partners to most effectively deliver

compelling, unique customer experiences (see Figure 3).

Source: IBM Institute for Business Value analysis.

Figure 3Digital Reinvention follows a path from digitization through digital transformation

Digitization

Digitaltransformation

DigitalReinvention

Improves efficiency by applying technology to individual resources or

processes

Digitizes entire aspects of a business producing customer experiences

that support individuals’ needs or wants

Incorporates digital technologies like never

before to create revenues and results via innovative strategies, products and

experiences

7

Applying concepts of Digital Reinvention to traditional banking value chains and banks can

yield dramatically expanded benefits beyond traditional process reengineering and organiza-

tional redesign. Traditional approaches of efficiency improvement and cost reduction have

characterized bank strategies over the past decade. These approaches are internal-looking

and not conducive to customer expansion and revenue growth.

By contrast, Digital Reinvention is holistic, beginning and ending with what customers want

and how they want it. It employs multiple digital technologies and approaches – including

cloud, blockchain, mobile, the Internet of Things (IoT), AI, automation, DevOps, Agile and Lean,

among others. Digital Reinvention is not tied to any particular technology, but rather is an

approach that might encapsulate multiple innovative technologies – now or in the future.

For example, a prominent North American banking organization is improving its customer

rewards program by using blockchain technology. The use of blockchain results in its

customers enjoying real-time data about their rewards account and a much better

user experience.

A European bank has launched a Facebook app that not only allows customers to perform

most banking functionality on standalone applications, but supports creation of personalized

cards with photos, as well as mechanisms that facilitate customers making micro-donations

to charities most aligned to their interests.

And Turkey-based DenizBank is linking together its digital payment subsidiary fastPay with

fintech start-up Qapel to launch an interactive TV quiz show. The show allows viewers to win

Qapel cryptocurrency that is spent exclusively through the fastPay network, allowing

DenizBank to acquire new customers and increase transactions on its network.11

Macquarie Bank reinvents itself as an open banking platform

Macquarie Bank, based in Australia, has

invested in a slew of digital initiatives and is

rolling out the Australian market’s first open

banking platform. It built a data layer between

legacy systems and customers, and is applying

advanced data analytics and machine learning

to build a 360-degree view of the customer.

Powered by APIs, the “Macquarie open

platform” will allow fintechs and other startups

to plug directly into the Macquarie banking

system to build and offer more relevant

products and services to its customers.10

8 Realizing tomorrow today

Readying for reinvention

For successful Digital Reinvention, banks need to pursue a new strategic focus, build new

expertise and establish new ways of working (see Figure 4).

Pursue a new focus

Banks and their ecosystem partners need to continue developing more secure ways of

creating compelling experiences, building and hardening platforms and monetizing new value

opportunities. Initiatives might include spawning new business models, tapping new forms of

financing and developing better, more holistic ways of conducting risk assessments. Leaders

will also need to create deep, AI-enabled contextual capabilities.

Build new expertise

Banks should also continue digitizing processes, functions and activities enterprisewide,

where it has not been done already. Analog or manual processes are not conducive to

efficiency or agility. Banks can pursue new forms of intelligent automation that are fully

integrated into operations. Reconceived processes will need to be flexible and agile. To the

extent allowed by regulation, these new processes will need to support individualized experi-

ences, and ecosystem connectivity and transparency.

Establish new ways of working

Banks should identify, assemble and retain the talent necessary to create and sustain a highly

digital organization. It will be essential to create, embrace and perpetuate innovation within the

bank and across the ecosystem. Innovation-infused culture will inevitably incorporate design

thinking, agile working and fearless experimentation.

Adopt a self-funding approach

To protect and expand their platforms, banks will need to deploy new technologies quickly

and in ways that support scalable growth and sustainability. They will need to use the latest

digital tools to optimize operations and increase earnings which can, in turn, be used to fund

additional investment in innovation and growth.

Source: IBM Institute for Business Value analysis.

Figure 4The Digital Reinvention operating environment revolves around new experiences

New FocusNew business models

and new ways tocreate value

New ExperiencesRedefined customer experience with new

products and services

Orchestrated Symbiotic

Cognitive Contextual

New Waysto Work

Digitized operations built for efficiency and

customer centricity

New Expertise

Capabilities built through a culture of

openness, innovation and collaboration

9

Embrace digital drivers

Banks will also need to remain digital leaders. Technology underpins platforms and

ecosystems, and it is foundational to the creation of the reinvented customer experiences.

Embracing Digital Reinvention rather than incrementalism provides a pathway for the most

visionary banks to adopt an “experience-first” planning approach, employing the strengths of

ecosystem partners and themselves (see Figure 5).

Source: IBM Institute for Business Value analysis.

Figure 5Digital Reinvention framework

Cognitive &Analytics

RestlessTalent

ResponsiveOperations

ActionableInsights

OrchestratedEcosystems

New BusinessModels

MarketActivation

Security

CloudEmerging

Technologies

Internetof Things Social

Experience

NewExpertise

NewFocus

New Waysto Work

Blockchain Mobile

10 Realizing tomorrow today

Deep dive on digital

To set out on the path toward Digital Reinvention, banking industry leaders can take four

initial steps.

Step 1: Envision possibilities

Conduct envisioning sessions based on design thinking to produce a definitive reinvention

blueprint. Through deep conversations and in-depth marketing analysis, develop a better

understanding of customer needs, aspirations and desires. Brainstorm new ideas to enhance

engagement and visualize unexpected customer scenarios. Incorporate external stake-

holders, including customers, in these sessions to encourage thinking that goes beyond

business as usual.

Step 2: Create pilots

Develop prototypes using agile development, test them with customers and get them to

market quickly to promote feedback and iteration. Establish communities of interest to create

“safe” environments to beta test innovations and include them as a central part of design and

development processes.

Step 3: Deepen capabilities

Augment digital capabilities with strategic initiatives. Continue to build and deploy necessary

applications aligned to the targeted Digital Reinvention operating model, platform and

ecosystem strategy. As pilots evolve, impediments to development will emerge, highlighting

limitations in existing capabilities. Enact a continuous, iterative strategy to address limitations

by building new or extending existing capabilities.

Step 4: Orchestrate ecosystems

Embrace a strategy based on holistic reinvention rather than a series of point solutions, main-

taining a clear focus on deep needs, aspirations and desires of customers, clients (such as

partners) and colleagues (such as service providers). Use ecosystems to expand and align a

broader set of capabilities and to help create and deliver on customer promises.

solarisBank is a tech company with a banking license

Founded in 2016 and based in Berlin,

solarisBank is a banking platform with a full

banking license.12 Through its technology

platform, it allows startups and other

businesses to offer various financial services.

Partners can access solarisBank software

modules in e-money, instant credit and digital

banking, as well as services from third-party

providers integrated on the platform via API.

Autoscout24, Europe’s largest online car

marketplace, integrated solarisBank rapid

credit onto its platform to offer instant loans

to buyers and significantly reduce the barriers

to purchase, increasing deals and activity.13

solarisBank also acts as a regulatory banking

and technology partner to fashioncheque,

Europe’s largest gift card issuer in fashion and

textiles, which previously would have required

an electronic money license to operate.14

11

Key questions

• How can you make your digital strategy ambitious enough to deal with disruption?

• How do you make your bank more agile and secure, so it is better equipped to respond to

unexpected challenges and opportunities?

• What steps can you take to make your banking workforce open and flexible, and more

risk-aware?

• How can you help your banking leadership become more visionary, conceiving what

customers want before they know it themselves?

12 Realizing tomorrow today

About the authors

Sarah Diamond is the Global Managing Director, Banking and Financial Markets for IBM. She is

responsible for IBM’s overall relationship with major financial services firms globally, helping

them transform their businesses to respond to the rapidly changing regulatory, business and

technology landscapes. Sarah helped launch the Watson Financial Services group and she is

Vice Chair, Promontory Financial Group, an IBM Company. She is a board member of the IBM

Academy of Technology and the IBM Industry Academy, where she was the founding President.

Sarah can be reached on LinkedIn at linkedin.com/in/sarah-diamond-044a99/ and by email at

diamonds@us.ibm.com.

Anthony Lipp is the Global Strategy Leader for Banking and Financial Markets at IBM, where

he leads the development and execution of IBM strategy for banking and financial market

clients worldwide. Anthony has more than 20 years of diverse industry and consulting

experience. He has advised top management on major strategy, organization and enterprise

transformation initiatives in the banking, capital markets and insurance industries. Anthony

can be reached at email anthony.lipp@us.ibm.com.

Nick Drury is the Global Banking and Financial Markets Leader for the IBM Institute for

Business Value. Nick has over 20 years of practitioner experience with blue chip companies in

banking and financial markets across three continents. His recent consulting portfolio

includes leading global banking groups and major financial services players in Asia Pacific on

deep transformation journeys. Nick can be reached on LinkedIn at linkedin.com/in/nicho-

las-drury-90751a43/, on Twitter @nicholasdrury1 and by email at nickd@sg.ibm.com.

Anthony Marshall is Research Director at the IBM Institute for Business Value. Anthony has

consulted extensively with US and global clients, working with numerous top-tier organiza-

tions in innovation management, digital strategy, transformation and organizational culture.

Anthony can be reached on LinkedIn a linkedin.com/in/anthonyejmarshall, Twitter at

@aejmarshall and by email at anthony2@us.ibm.com.

For more information

To learn more about this IBM Institute for Business

Value study, please contact us at iibv@us.ibm.com.

Follow @IBMIBV on Twitter, and for a full catalog of our

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visit: ibm.com/iibv.

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critical public and private sector issues.

13

Notes and sources1 2016 Global Ecosystem Survey. IBM Institute for Business Value in collaboration with the Economist

Intelligence Unit (Unpublished data.)

2 Ibid.

3 Ibid.

4 Ibid.

5 Fakhri, Daoud. “BBVA’s digital transformation continues to impress.” Banknext. April 23, 2017. https://

banknxt.com/61519/bbva-digital-transformation/; Peyton, Antony. “BBVA launches fintech challenge for

start-ups.” Banking Technology. March 15, 2017. http://www.bankingtech.com/771252/bbva-launches-fin-

tech-challenge-for-start-ups/; “BBVA launches Open API marketplace.” Finextra. May 24, 2017. https://www.

finextra.com/newsarticle/30614/bbva-launches-open-api-marketplace

6 Morisi, Teresa L. “Commercial banking transformed by computer technology.” Monthly Labor Review. August

1996. https://www.bls.gov/opub/mlr/1996/08/art4full.pdf. Accessed October 17, 2017.

7 Moseri, Kevin. “Why are banks ‘trying to shapeshift’ into technology companies?” BANKNXT. September 2,

2015. https://banknxt.com/52941/banks-technology/

8 Morisi, Teresa L. “Commercial banking transformed by computer technology.” Monthly Labor Review. August

1996. https://www.bls.gov/opub/mlr/1996/08/art4full.pdf. Accessed October 17, 2017.

Related reports

Berman, Saul J., Peter J. Korsten and Anthony Marshall.

“Digital reinvention in action: What to do and how to

make it happen.” IBM Institute for Business Value. May

2016. https://www-935.ibm.com/services/us/gbs/

thoughtleadership/draction/

Berman, Saul J., Nadia Leonelli and Anthony Marshall.

“Digital reinvention: Preparing for a very different

tomorrow.” IBM Institute for Business Value. December

2013. https://www-935.ibm.com/services/us/gbs/

thoughtleadership/digitalreinvention/

Brill Jim, Nicholas Drury, Anthony Lipp, Anthony

Marshall, Likhit Wagle. “Banking redefined: Disruption,

transformation and the next-generation bank.” IBM

Institute for Business Value. October 2015. https://

www-935.ibm.com/services/us/gbs/thoughtleader-

ship/bankingredefined/

Brill Jim, Nicholas Drury, Allan Harper, Likhit Wagle.

“The cognitive bank: Decoding data to bolster growth

and transform the enterprise.” IBM Institute for

Business Value. September 2016. https://www-935.

ibm.com/services/us/gbs/thoughtleadership/

cognitivebank/

14 Realizing tomorrow today

9 “World’s first ATM machine turns to gold on 50th birthday.” Reuters. June 27, 2017. https://www.reuters.com/

article/us-atm-anniversary/worlds-first-atm-machine-turns-to-gold-on-50th-birthday-idUSKBN19I166

10 Eyers, James. “Macquarie trumps big four with new open banking platform.” Financial Review. September 18,

2017. http://www.afr.com/business/banking-and-finance/macquarie-trumps-big-four-with-new-open-

banking-platform-20170914-gyhbxy; Flinders, Karl. “Customer experience transformation at Macquarie bank

brings legacy system retirement as a bonus.” Computer Weekly. May 16, 2017. http://www.computerweekly.

com/news/450418866/Customer-experience-transformation-at-Macquarie-bank-brings-legacy-system-

retirement-as-a-bonus; Yoo, Tony. “Macquarie moves first on ‘open banking.’” Business Insider Australia.

September 18, 2017. https://www.businessinsider.com.au/macquarie-has-beaten-the-big-four-to-

open-banking-which-lets-customers-offer-their-data-to-fintech-startups-2017-9

11 Macknight, Joy. “The Banker Technology Projects of the Year Awards 2017.” The Banker. August 1, 2017.

http://www.thebanker.com/Transactions-Technology/The-Banker-Technology-Projects-of-the-Year-

Awards-2017?ct=true

12 O’Hear, Steve. “FinLeap’s solarisBank to offer Banking-as-a-Platform so startups can ride fintech gravy

train.” Techcrunch. March 2016. https://techcrunch.com/2016/03/14/solarisbank/

15

13 “AutoScout24 needed an in-house credit solution.” solarisBank case study. https://www.solarisbank.de/

pioneer-showcase/auto-scout-24. Accessed on October 17, 2017.

14 “A gift card for every fashion lover.” solarisBank case study. https://www.solarisbank.de/pioneer-showcase/

fashioncheque. Accessed on October 17, 2017.

16 Realizing tomorrow today

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